Reconsideration
83 I summarised earlier the matters which, in combination, ASIC relied upon for its contention that a fair-minded observer might reasonably apprehend that the respondents might not act independently and impartially in the liquidation.
84 ASIC submitted that the respondents had a "referral relationship" with the Mawson Group which they would not wish to jeopardise, and that therein lay an interest conflicting with the proper discharge of their duties as liquidators.
85 The conflict was said to be between the respondents' interest in receiving further referrals of insolvency work from the Mawson Group and the revenue which that work would generate, on the one hand, and their duty as liquidators, on the other, having regard to their responsibilities to the creditors of WCPL and WCQPL, and to the public interest. Consideration of the view of the hypothetical fair-minded observer in a case of this kind requires analysis of the interest said to give rise to the conflict and of the effect which that interest may have on the discharge of the respondents' duties. It is necessary to keep firmly in mind that there must be a real, and not merely theoretical, possibility of conflict of duty or interest.
86 Mr Horne accepted that LDD had a "referral relationship" with the Mawson Group. He deposed that the firm had, in early 2012, formed "a professional relationship" with the Mawson Group pursuant to which "a representative of Mawson would contact either myself or Mr Franklin directly and organise a meeting to discuss a potential appointment". Mr Horne also identified the "projects" referred to LDD since the "referral relationship" with the Mawson Group had commenced.
87 However, the evidence did not provide any further detail regarding the relationship. In particular, it did not suggest that the respondents and the Mawson Group had reached some form of agreement or understanding that the latter would, from time to time, refer business to LDD, or that LDD actively solicited the referrals, or that it engaged in other forms of activity to procure the referrals. Nor did the evidence indicate whether LDD was the only firm to which the Mawson Group made referrals of this kind. Rather, the evidence indicated only that the Mawson Group did, from time to time, refer matters to the respondents' firm. Accordingly, the expression "referral relationship" appears to refer only to the practice of the Mawson Group referring "projects" to LDD from time to time.
88 Mr Horne did say that LDD utilised referrals from a number of sources so as to ensure that its income was not overly reliant on referrals from any one source. The Australian Taxation Office (ATO) and the Australian Financial Services Authority were responsible for the largest number of referrals, comprising approximately 25% of all referrals, in the two year period before 3 October 2013. It may be implicit in this statement of Mr Horne that ASIC does solicit referrals from entities such as the Mawson Group, but Mr Horne was not questioned on this topic.
89 The Mawson Group commenced referring work to LDD in about February 2012. In addition to WCPL and WCQPL, its referrals had led to members of LDD being appointed as administrators and/or liquidators of six companies. These constituted about 2% of the referrals to LDD in the two year period between 3 October 2011 and 3 October 2013. It is evident that at least one of the referrals involved a large administration.
90 In the 2012 financial year, the revenue of LDD from referrals from the Mawson Group (about $500,000) comprised just under 10% of the revenue of the firm's insolvency division, and some 4.4% of the firm's overall revenue. In the 2013 financial year, revenue from the Mawson Group's referrals (about $250,000) comprised a little over 5% of the revenue of LDD's insolvency division, and a little under 2% of the firm's overall revenue.
91 ASIC submitted that these amounts and proportions would be regarded by the fair-minded observer as significant and, given that the Mawson Group had only recently commenced making the referrals to LDD, the respondents had a material financial interest in not jeopardising the prospect of further referrals. It was this financial interest which was said to give rise to the conflict of interest.
92 Counsel for the respondents submitted that both the amounts and the proportions of the fees generated by LDD from the Mawson Group referrals were modest, and, accordingly, were not of a kind to give rise to a real conflict of interest. He emphasised that LDD received referrals from a variety of sources. Counsel also submitted that the fair-minded observer would have regard to the circumstance that it is common for firms such as LDD to receive referrals of work from other entities and to a circumstance to which Mr Horne deposed, namely, that it has not been uncommon for LDD, during the course of a liquidation, to investigate transactions involving those who had referred companies to the firm. This included transactions involving the ATO and, in one case, a firm of Melbourne lawyers. The respondents submitted that this was an ordinary feature of liquidations and well understood by those in the liquidation field.
93 Mr Horne also deposed that, in relation to two previous administrations or liquidations, LDD had engaged Ernst & Young to conduct a review of sales to determine whether they had been made bona fide and for market value. Mr Horne said that a similar exercise would be undertaken in the present case. In his cross-examination, Mr Horne rejected the proposition that the third party advice in the previous cases had been sought because LDD was concerned about its own independence: he said that LDD considered both transactions to be bona fide but wished to have its opinion confirmed, especially as in one case the subject of the transaction was a matter on which LDD did not have expertise.
94 In my opinion, knowledge of matters of these kinds can be imputed to the hypothetical fair-minded observer, save only that it would be going too far to infer that the observer would also know that the respondents intended, as a matter of fact, to adopt the course of engaging independent advisors in this case.
95 On the other hand, I do not consider that the fair-minded observer would regard remuneration of the order of that received by LDD from the Mawson Group's referrals as modest. Most creditors of companies such as WCPL and WCQPL are likely to regard amounts such as $250,000 and $500,000 as significant and the hypothetical fair-minded observer is likely to have the same view. At the very least, the fair-minded observer might apprehend that LDD may not wish to put their continued receipt of income of these proportions in jeopardy. That is especially so in the circumstance that the "referral relationship" had only recently been formed and that the number of referrals had been slowly increasing. Hence, I conclude that ASIC has established that the reasonable fair-minded observer might consider that LDD had an interest which conflicted with their duties. I will return to the consequences of this finding after considering the other matters upon which ASIC relied.
96 ASIC drew attention to the circumstance that three of the previous referrals from the Mawson Group to LDD had also involved pre-administration transactions between the company in question and entities created, owned or controlled by the Mawson Group. It contended that the fair-minded observer might perceive that the Mawson Group had a particular business model in this respect, and that this was relevant to the assessment of the perception of such an observer.
97 In my respectful opinion, ASIC's submissions did not make clear how that could be so. ASIC did not contend that the respondents or LDD were parties to the postulated business model, or that they were participants in its implementation. ASIC did not lead any evidence suggesting that the respondents had not properly investigated the pre-administration transactions in the earlier referrals so as to support an inference that the like transactions in the case of WCPL and WCQPL may not be properly investigated. Evidence of that kind would appear in any event to be tendency evidence to which s 97 of the Evidence Act 1995 (Cth) refers, and ASIC had made no attempt to comply with the requirements of that section in relation to tendency evidence.
98 It is also far from clear that knowledge of the pre-administration transactions which had occurred in the case of the other referrals could be imputed to the fair-minded observer.
99 In my opinion, it is not possible to attach any significance to this aspect of the Mawson Group referrals to LDD.
100 As to the closeness of the relationship between LDD and the Mawson Group, ASIC relied again on the existence of the referral relationship. However, apart from the evidence about the number of referrals and the period during which they occurred, there was, as I have said, very little primary evidence about how the relationship worked in practice, and how it was sustained. Account has already been made of the financial interest to which the relationship gave rise. Accordingly, it is difficult, in my opinion, to conclude that the fair-minded observer would attach any additional significance to the existence of the relationship.
101 ASIC relied on the circumstance that it was the Mawson Group which had recommended the respondents to WCPL and WCQPL, and that this had led to their appointments as administrators. As noted earlier, it was Mr McCurry who contacted Mr Franklin on about 26 September 2013, and Mr Franklin's first meeting with Mr Walton took place at the office of the Mawson Group in the presence of Mr Spry.
102 In my respectful opinion, it is not easy to see how, other than in possibly minor respects, these matters could bear on the closeness of the relationship between the Mawson Group and LDD. On the basis of Mr Horne's evidence, it seems that the contact by Mr McCurry on or about 26 September 2013 was consistent with the ordinary means by which a referral from the Mawson Group was instigated. The circumstance that the meeting between Mr Franklin and Mr Walton took place at the office of the Mawson Group indicates a degree of closeness between the Mawson Group and Mr Walton, but otherwise does not seem particularly significant. In regard to these matters, I consider that the fair-minded observer would know that it would be commonplace for proposed administrators or liquidators to meet company directors before their appointment, and that those meetings often included the provision of preliminary advice to the distressed company.
103 It could perhaps be said that, by allowing Mr Spry to be present, Mr Franklin had permitted him to be privy to what he had been told by Mr Walton and to any preliminary advice which he had given on that day, and that this, possibly, indicated some favouring of the Mawson Group. However, ASIC has not made an allegation or submission to that effect and it would be inappropriate to act on the basis that it had.
104 I agree with ASIC's submission that the Mawson Group appears to have influenced the selection of the persons who, as liquidators, would investigate their own pre-administration conduct. The fair-minded observer can be regarded as knowing that it is commonplace for distressed companies to rely on their advisers for this selection. That may suggest, prima facie, that this is a matter of little significance. However, by analogy with the principle that litigants do not get to choose their judges, of which the fair-minded observer can also be taken to be aware, the observer might reasonably think that the Mawson Group's involvement as participants in pre-administration transactions, whose lawfulness would be investigated, and their role in influencing the appointment of those who would examine their conduct, were causes for disquiet. It would be natural for the fair-minded observer in these circumstances to think that, by reason of the Mawson Group's relationship with LDD, it regarded LDD as being possibly more amenable to its interests than others might be. Accordingly, I consider that this circumstance could add to the apprehension of the fair-minded observer. It is appropriate, however, to repeat in this context that ASIC eschewed any suggestion of incompetent or non-diligent performance of duties by the respondents.
105 Next, ASIC relied on what it said were shortcomings in the disclosures made by the respondents to the creditors of WCPL and WCQPL, both in the respective DIRRIs and more generally at the creditors' meetings. As will be seen, I agree with Robertson J that ASIC's appeal against the decision of the primary Judge concerning the alleged contraventions of s 436DA of the Corporations Act should be dismissed. Because of that conclusion, I do not accept ASIC's submission that the lack of full disclosure in the DIRRIs under s 436DA of the Corporations Act is a matter to be taken into account in relation to the issue of apprehended bias, whether on the basis that the reasonable bystander would know what should be disclosed under s 436DA or on the basis that a breach of that section contributes to the apprehension of bias.
106 However, ASIC's claim of incomplete disclosures was not confined to the alleged shortcomings in the DIRRIs on which it relied for that part of its claim.
107 ASIC made a number of contentions. First, that, in the DIRRIs dated 7 October 2013 for WCPL and WCQPL, the respondents had not disclosed that the administrators or liquidators may need to investigate pre-administration transactions, including transactions involving members of the Mawson Group, and that Mr Franklin's meeting with Mr Walton on 27 September had been held at the office of the Mawson Group in the presence of Mr Spry. Secondly, that, at the respective creditors' meetings of WCPL and WCQPL held on 15 October 2013, the respondents had not disclosed that Mr Kirzner of the Mawson Group had been a director of Tantallon until 24 September 2013 (a few days before the ASA was executed), that the shareholders of Tantallon were Mr Knapp and Mr Kirzner, that Lewton's principal place of business and registered office were the same as those for the Mawson Group, and the ultimate ownership of QHT. Thirdly, that, in the reports dated 29 October 2013 pursuant to s 439A of the Corporations Act prepared in respect of both WCPL and WCQPL, the respondents had not disclosed the control and shareholding of Tantallon, had not disclosed that the administrators or liquidators may need to investigate pre-administration transactions involving members of the Mawson Group, had not disclosed that Lewton's registered office and place of business were the same as those of the Mawson Group, had not disclosed the ownership and control of QHT, and had not disclosed that the debt assignment from WCQPL to QHT was a questionable assignment which had to be investigated. ASIC made complaints of a similar nature in respect of the disclosures made at the respective creditors' meetings held on 8 November 2013 at which the resolutions for the winding up of WCPL and WCQPL had been passed.
108 In my opinion, the fair-minded observer would not attach the significance to these omissions which ASIC imputed to them. Such an observer would, in my opinion, appreciate that, in the case of large and complex administrations, as was apparently the case in relation to both companies, it is not practical for the administrators at the creditors' meetings, and in particular at the first creditors' meeting called shortly after the administrators' appointment, to canvass all matters of this kind in detail. The fair-minded observer would also have regard to the statements of Mr Stone, who chaired the meeting of WCPL's creditors in Melbourne on 15 October 2013, that the administrators had sought legal advice in respect of the ASAs and were reserving their rights, that the Mawson Group had been involved in the pre-administration transactions, and that the administrators were alert to the prospect that some of the pre-administration transactions of WCQPL may be voidable in the event that that company went into liquidation.
109 In these circumstances, I would not conclude that a fair-minded observer might have attached any significance to the non-disclosures alleged by ASIC.
110 ASIC contended that certain of the statements made by the respondents at the creditors' meetings evidenced a benign view of the pre-administration transactions and supported an inference by the fair-minded observer that the respondents may not investigate these vigorously and independently. Counsel referred first to the statement of Mr Stone at the meeting of the creditors of WCPL on 15 October 2013 that, as Peloton (Tantallon) and Lewton were taking over projects with estimated revenue of $56 million but estimated costs to completion of $61 million, it appeared to be in the interests of creditors for the arrangements to continue. However, the fair-minded observer would also have noted that immediately after making that statement, Mr Stone said that the respondents had sought legal advice in respect of the ASAs and had reserved their rights.
111 Counsel also referred to the following exchange with Mr Franklin at the meeting of creditors of WCQPL on 15 October 2013:
Creditor: What is the reason why you won't stand in the way of the ASAs?
Chairman: At this time I don't have funds in the administration to continue to run the business or complete the projects. The ASAs were entered into before my appointment, and we have taken the view that if some contracts can be novated it will be a better outcome for the company. This is because there will be a reduction in employee entitlements, a reduction in sub-contractor liability, and a reduction in secured debt through the release of guarantees. These reductions are all to the benefit of the company.
Creditor: If a client has been substantially underbilled, wouldn't it be better off to hang on to that project?
Chairman: I will reserve my rights against the purchasers. On the face of it, it appears that the ASA is a benefit to creditors as it allows a resolution to the projects which would otherwise have not been available.
Again, I doubt that the fair-minded observer would have attached the significance to these passages which counsel for ASIC imputed to them. On its face, Mr Franklin gave a plausible and reasonable answer to the enquiry about the ASAs and indicated that the administrators would reserve their rights against the purchasers under the ASAs.
112 Finally, ASIC referred to the concerns of some creditors raised at the respective meetings of creditors. At the first meeting of creditors of WCPL held on 15 October 2013, Mr Stone, who was the chairperson, reported that the Mawson Group had worked with WCPL on the establishment of Lewton and Tantallon (then Peloton), and on the assignment of the debt of $18.9 million from WCQPL to QHT. In the questions which followed, the following exchange occurred:
Creditor 1: Has the transfer of a debt for $18m to QHT Investments Pty Ltd (QHT) been investigated? How did it get to $18m?
Chairman: Yes. The Queensland operations were apparently profitable and supported the New South Wales and Victorian operations via an intercompany loan account. A debt for $18.9m owed by this company to Walton Qld was purchased by QHT, a company associated with Mawson in September 2013.
Creditor 1: Who set up QHT?
Chairman: The sole director of QHT is Mr Pat McCurry of Mawson Group.
Creditor 2: Who referred Craig Walton to you?
Chairman: Mr McCurry.
Creditor 2: Have you dealt with Mr McCurry before? Has Mawson done anything like this before? Are you comfortable with your relationship with Mawson?
Chairman: Yes, Mawson are corporate advisors and in the business of restructuring. We have previously accepted appointments from Mawson. Insolvency practitioners are able to accept referrals from other professionals. The Administrators see no risk to their independence and if an issue arises there are procedures available to deal with any perceived conflict and legal advice will be sought.
As can be seen, it is evident that these creditors were raising questions about the respondents' relationship with the Mawson Group. Questions asked by other creditors indicated that they had concerns about the possible unlawfulness of conduct of Mr Walton and of the pre-administration transactions.
113 The meeting considered proposals for the appointment of administrators other than the respondents. First, a proposal that the firm of Jirsch Sutherland be appointed as administrators failed (8 creditors in favour, more than 20 against and 2 abstentions). A proposal that the firm of Rodgers Reidy Chartered Accountants be appointed administrators also failed, but only after a poll was taken. Forty-nine creditors, in respect of debts totalling $5.9 million, voted in favour; 23 creditors, in respect of debts totalling $27.1 million, voted against; and 5 creditors, in respect of debts totalling $2.7 million, abstained. Those voting against included QHT with its debt of $18.9 million. Mr McCurry was the sole director of QHT at that time and accordingly could decide how it voted. The resolution in favour of Rodgers Reidy required a majority both of the creditors voting and in the value of the debts owed. Mr Stone, as chairman, could have used his casting vote in favour of Rodgers Reidy, but chose not to, referring to the work which the respondents had already performed and to the interests of the creditors in having the same administrators appointed to both WCPL and WCQPL.
114 It is not clear from the minutes of the meeting whether the proposals for the appointment of alternative administrators were prompted by concerns which the creditors had about the position of the respondents in relation to the Mawson Group, but the minutes do not disclose any other cause for dissatisfaction by the creditors with the respondents.
115 At the second creditors' meeting of WCPL on 8 November 2013, it was apparent that some creditors were still concerned about the lawfulness of the pre-administration transactions, but no questions were raised about the respondents themselves, and the resolution that they be appointed liquidators of WCPL was carried on the voices.
116 At the first creditors' meeting of WCQPL held on 15 October 2013, the questions from creditors indicated an underlying concern about the lawfulness of the pre-administration transactions and of Mr Walton's conduct. However, no creditor raised a concern about the respondents' appointment. A proposal that the respondents be replaced by Rodgers Reidy Chartered Accountants failed on the voices.
117 At the second creditors' meeting of WCQPL held on 8 November 2013, one creditor asked questions which indicated a concern about the respondents' relationship with the Mawson Group:
Creditor: In the DIRRI you advised that you met with Mr Walton and that this matter came to you through Mawson.
Chairman: Yes, Mawson refer us work.
Creditor: Apparently Mr Walton consulted with Mawson months ago. Did you have discussions with Mawson prior to Mr Walton approaching you?
Chairman: I had a discussion with Mawson, however this discussion was very limited in detail and the name of the company was not disclosed. The discussion was in the context of arranging the first meeting with Mr Walton on 27 September 2013.
Creditor: Did you provide a copy of the report to Mawson before it was released to creditors?
Chairman: No.
Creditor: In the report it paints a glowing light on Mawson.
Chairman: I don't agree that the report puts a glowing light on Mawson or Mr Walton.
Creditor: In the executive summary of the report you advised a lot of work had been done and projects were transferred for the benefit of unsecured creditors. I think it was done to minimise secured creditors, as Mr Walton signed personal guarantees for the secured debt.
Chairman: The secured creditors generally supported the ASAs. The reduction of the secured debt exposure is a benefit to the company as a whole. There were also other direct benefits to reduce unsecured creditor debts owed to sub-contractors and also employee entitlements. In regard to the ASAs, I have reserved my rights. In liquidation they may be deemed as uncommercial and voided by a liquidator.
It is also to be noted that one creditor drew attention to the presence of Mr Spry from the Mawson Group as an observer at the meeting, and asked that he be removed. This appears indicative of some sensitivity about the role of the Mawson Group, although not necessarily indicative of concern about the respondents' independence from that group. However, the resolution that WCQPL be wound up and that the respondents be appointed its liquidators was carried on the voices.
118 Mr Dang, an officer from ASIC, has deposed that ASIC has also received expressions of concern about the appointment of the respondents as liquidators to the two companies. However, given the confidentiality said to attach to these communications, Mr Dang did not produce them to the Court. In that circumstance, I consider it inappropriate to attach weight to Mr Dang's report of the communications.
119 Counsel for the respondents referred to the statements made by each of Mr Stone and Mr Franklin at the respective meetings indicating the intention of the respondents to investigate the pre-administration transactions. I have referred to some of these already. The remainder to which counsel referred were of a relatively routine kind and it is not necessary to quote them for present purposes. I agree with counsel that the fair-minded observer is likely to have accepted those statements at face value, and that they militate against the reasonable apprehension which ASIC attributes to that observer.
120 Counsel for the respondents submitted that none of the creditors of WCQPL had raised any concern about the respondents' appointment as liquidators and that the creditors could be regarded as "a good proxy" for the reasonable bystander in this context. This submission is literally true, but it overlooks, insofar as it concerns the creditors of WCQPL, the questions raised by the creditor at the meeting on 8 November 2013 quoted above, which indicated that that creditor at the least had concerns about the respondents' position. Further, if one accepts the submissions that creditors are "a good proxy for the reasonable bystander", then the questions raised at the meetings of WCPL on 15 October 2013 and of WCQPL on 8 November 2013, together with the unsuccessful attempts to have the respondents removed as administrators of WCPL, tend to support ASIC's contention that the fair-minded observer not only might have, but did have, a reasonable apprehension that the respondents might not discharge their duties independently and impartially. Thus, I regard this matter as supportive of ASIC's contentions.
121 ASIC led evidence at the trial of a creditors' meeting in relation to the administration of a company formerly known as Redset Group Pty Ltd (Redset) which occurred on 5 September 2013. Mr Franklin was the administrator of Redset. The administration of Redset had been referred to LDD by the Mawson Group. The minutes of the meeting on 5 September 2013 concerning Redset indicate that the solicitor for one creditor raised forcefully issues about the independence of Mr Franklin. Subsequently, a proposal that Mr Franklin be replaced as administrator was lost. ASIC submitted that the circumstances pertaining to Redset were similar to those pertaining to WCPL and WCQPL, and that regard could be had to the views expressed by the solicitor at the meeting in considering the apprehension of the hypothetical reasonable fair-minded observer. I agree that this may be so in a general way but, given that the Court is in no position to determine the similarity or otherwise of Redset's circumstances with those of WCPL and WCQPL, doubt that it is a matter to which it is appropriate to give much weight. I decline to do so.
122 ASIC drew attention to the Code of Professional Practice for Insolvency Practitioners (the Code) published by the Insolvency Practitioners Association of Australia and, in particular, to Chapter 6 of the Code. That chapter emphasises the importance of insolvency practitioners being, and being seen to be, independent in the discharge of their duty and the importance of practitioners considering the question of independence at the time of accepting an appointment.
123 Counsel made submissions concerning the circumstances of this case by reference to the contents of the Code. Those contents reflect the principles which have already been canvassed in these reasons and appear to be drawn from some of the authorities to which reference has already been made. That being so, it is unnecessary, in my opinion, to address separately the parties' submissions concerning the Code.